Trade policy (2009-12) document has outlined a number of
factors, external and domestic, as potential challenges to external sector
economy, particularly the exports.

EXTERNAL FACTORS

* Economic downturn in major markets
* Buyer's perception of Pakistan as a supplier of low quality products and
inability to deliver in bulk and in time
* Negative travel advisories

DOMESTIC FACTORS

* High cost of finance
* Energy crises (gas and power)
* Law and order situation
* Decline in investment
* Decline in large scale manufacturing growth

The factors related to enhanced market
access are guided by world economic conditions and product and price
competitiveness of the country. The world economic conditions have deteriorated
during the last three years and Pakistan has hardly made any headway in product
and price competitiveness during this period. Export sector has off and on
benefitted from circumstantial factors that force the world community to soften
its stance either out of sympathy or for some political reasons. After 9/11,
textile sector benefitted from economic favors the US and EU showered on
Pakistan for its role as frontline US ally against war on terrorism. Textile
sector earned a lot of money but failed to consolidate itself. Once the
concessions were withdrawn, the sector again went into a tailspin. The recent
floods again brought us into the world focus but failure on the governance side
and corrupt ways of business prevented the leading markets from granting
Pakistan any worthwhile external economic concessions. The recently announced EU
tariff concessions for Pakistani exports of certain goods have neither been
taken well nor they deserved to. Analysts are of the view that the concessions
mostly apply to raw materials or low-value-added items. Textile sector laments
exclusion of bed linen and knitwears from the concessional list. Any US
government initiative to enlarge the scope of export incentives to Pakistan is
fiercely opposed by the US business and industrial communities as they feel that
tariff concession will directly affect their job market, which is already in a
bad shape in the wake of global recession.

Failure to make bulk, on-time
deliveries stems from the fact that we have chosen distant export markets
instead of following the gravity model according to which doing business with
markets that are close to one's own country promotes efficiency and cost
effectiveness.

The domestic factors are the
by-products of fiscal/monetary policy failures and the political and economic
mess that we created in the course of transition from a delivering autocratic
rule to a non-delivering democratic system. All the five domestic factors listed
above have, in one way or the other, increased the input costs making the
product and price competitiveness of exports highly improbable. High cost of
finance is the result of tight monetary stance that has not only failed to
contain inflation, but has also strengthened the choking hold on the economy.
SBP holds the dubious distinction of imposing the highest interest rate in the
region. On fiscal side, huge government borrowings for non-development
expenditure crowd out the private sector investment on one hand and keep the
inflationary pressures on the rise on the other. Energy crises, instead of
getting resolved, are being allowed to increase their force and scope. The
unmanaged circular debt crisis has entangled all the basic subsectors - power,
oil, gas, and refinery. While load shedding keeps the masses on the edge of
their nerves, frequent gas and power supply cuts to industry and business cause
huge economic loss. Decline in foreign investment emanates from a weak investor
confidence. As if the abrupt political change that took place in 2008 was not
enough, the ever-floating rumors of another change of government strengthen the
foreign investor resolve not to stage an early comeback.

The law and order situation, though not
perfectly good during the recent autocratic rule, has deteriorated greatly
during the last two and a half years. This further supports the view that the
return of foreign investor is only a distant possibility. The steep decline in
the flow of foreign investment puts pressure on the domestic currency and, in
turn, a depreciated rupee pushes the input costs further upward. Manufacturing
sector contributes more than 18 per cent to Pakistan's GDP. During the five-year
period (from 2002-03 to 2006-07) manufacturing grew at an average rate of 10.7
per cent. During 2007-08, the growth rate came down to 4.8 per cent and then in
2008-09 it recorded a negative rate of 3.7 per cent. According to the recently
released State Bank report, the industrial sector recorded a growth of 4.9 per
cent in 2009-10 due mainly to the picking up of construction industry in the
wake of lower building material prices. Real manufacturing sector, particularly
the large-scale manufacturing sector (LSM) is severely damaged by inapt monetary
and fiscal policy designs. Hindered flow of credit and high interest charges
raise the input costs to an unmanageable limit making the prospects of product
and price competitiveness in export markets very dim.